Morgan Stanley Recommends Investors Reduce Junk Bond Holdings

Investors should reduce their holding of junk bonds going into the last three months of the year, according to Morgan Stanley. Photographer: Victor J. Blue/Bloomberg

Sept. 25 (Bloomberg) -- Investors should reduce their
holdings of speculative-grade bonds going into the last three
months of the year as yields on the notes hover near record
lows, according to Morgan Stanley.

“Risk/reward for the asset class is less attractive today
than at any other point this year,” analysts Adam Richmond and
Jason Ng wrote in a report dated today. “The main driver of our
downgrade is unattractive total return prospects going
forward.”

Junk-debt funds recorded $3.63 billion of deposits in the
week ended Sept. 19, the second-biggest volume ever, according
to data compiled by EPFR Global, as the Federal Reserve said it
expected to hold its target rate near zero for at least another
three years. Yields on speculative-grade bonds in the U.S. fell
to an unprecedented 6.95 percent on Sept. 19, according to Bank
of America Merrill Lynch index data.

“Though spreads could tighten further, especially if rates
rise, we think dollar prices are topping out,” the Morgan
Stanley analysts wrote. Also, weaker economic data is putting
pressure on the credit quality of speculative-grade borrowers,
according to the analysts.